SBA 7(a) vs SBA 504 Loan Program

 

 

 

SBA 7(a) vs. SBA 504

 

 

 

Why go with an SBA loan through ICS?

Up to 90% LTV

Purchase, Refinance & Ground-Up Construction

Owner-user properties only

Fixed & Floating Rates

No Broker Points

 

 

SBA 7(a) Loan

The SBA 7(a) Loan Program, SBA’s primary business loan program, provides loan guaranties to lenders that allow them to provide financial help for small businesses with special requirements. 7(a) loans can be used for:

  • Acquiring, refinancing, or improving real estate and buildings
  • Short- and long-term working capital
  • Refinancing current business debt
  • Purchasing and installation of machinery and equipment
  • Purchasing furniture, fixtures, and supplies
  • Changes of ownership (complete or partial)
  • Multi-purpose loans, including any of the above

The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. Your lender will help you figure out which type of loan is best suited for your needs.

Eligibility?

To be eligible for 7(a) loan assistance, businesses must:

  • Be an operating business.
  • Operate for profit.
  • Be located in the U.S.
  • Be small under SBA Size Requirements
  • Not be a type of ineligible business
  • Not be able to obtain the desired credit on reasonable terms from non-Federal, non-State, and non-local government sources.
  • Be creditworthy and demonstrate a reasonable ability to repay the loan.

How do I pay back my 7(a) loan?

Loan repayment terms vary according to several factors.

  • Most 7(a) term loans are repaid with monthly payments of principal and interest from the cash flow of the business.
  • Payments stay the same for fixed-rate loans because the interest rate is constant.
  • For variable rate loans, the lender may require a different payment amount when the interest rate changes.

SBA 504 Loan

The SBA 504 Loan Program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation.

504 loans are available through Certified Development Companies (CDCs), SBA's community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by SBA.

The maximum loan amount for a 504 loan is $5.5 million. For certain energy projects, the borrower can receive a 504 loan for up to $5.5 million per project, for up to three projects not to exceed $16.5 million total.

Eligibility?

To be eligible for a 504 loan, your business must:

  • Operate as a for-profit company in the United States or its possessions
  • Have a tangible net worth of less than $15 million
  • Have an average net income of less than $5 million after federal income taxes for the two years preceding your application

Other general eligibility standards include  falling within SBA size guidelines, having qualified management expertise, a feasible business plan, good character and the ability to repay the loan.

Loans cannot be made to businesses engaged in nonprofit, passive, or speculative activities. For additional information on eligibility criteria and loan application requirements, small businesses and lenders are encouraged to contact a Certified Development Company in their area.

How do I use a 504 loan?

A 504 loan  can be used for a range of assets that promote business growth and job creation. These include the purchase or construction of:

  • Existing buildings or land
  • New facilities
  • Long-term machinery and equipment

Or the improvement or modernization of:

  • Land, streets, utilities, parking lots and landscaping
  • Existing facilities

A 504 loan  cannot  be used for:

  • Working capital or inventory
  • Consolidating, repaying or refinancing debt
  • Speculation or investment in rental real estate

SBA Loan Eligibility, Terms, Fees & More

Now that you know the main difference between the SBA 7(a) and SBA 504 loans, let’s break each of these SBA loan types down further. The chart below offers a more comprehensive look at the various characteristics of each of these SBA loans:

SBA 7(a) SBA 504
SBA Loan Amounts SBA 7(a) loans have a maximum of $5 million.SBA Express loans have a maximum of $350,000. SBA 504 loans have a maximum loan amount of $5.5 million; your loan maximum is dependent on the size of the project.
SBA Loan Rates Both fixed and variable rates are available. Rates are subject to SBA maximums and are negotiated by the lender and the applicant.

Interest rates

Interest rates for 7(a) loans are negotiated between the borrower and the lender, but are subject to SBA maximums, which are pegged to the prime rate or an optional peg rate. Interest rates may be fixed or variable..

The maximum interest rates for variable 7(a) loans are based off the Federal Prime Rate as follows:

Loan amount Max rate
$50,000 or less Base rate plus 6.5%
$50,001 to $250,000 Base rate plus 6.0%
$250,001 to $350,000 Base rate plus 4.5%
Greater than $350,000 Base rate plus 3.0%
Rates are fixed and are typically a percentage above the US Treasury market rate for 5 and 10- year loans.

Interest rates

Interest rates for 7(a) loans are negotiated between the borrower and the lender, but are subject to SBA maximums, which are pegged to the prime rate or an optional peg rate. Interest rates may be fixed or variable.

The maximum interest rates for variable 7(a) loans are based off the 5 or 10-YR Treasury as follows:

5 or 10-YR Treasury Index Rate + 1%
SBA Loan Terms Maturity terms for a 7(a) loan depend largely on the ability of the applicant to repay and the purpose of the loan. Below is a list of maximums based on purpose:

  • 25 years for real estate
  • 10 years for equipment
  • 7 years for working capital
 Maturity terms for a 504 loan are available at 10 years and 20 years.
SBA Loan Fees Fees are based on the guaranteed dollar amount and the maturity of the loan. These fees can be rolled into the overall loan. Fees will be based on 3% of the debenture. These fees can be rolled into the overall loan.
SBA Loan Requirements & Eligibility Businesses seeking a SBA 7a loan must meet the following requirements:

  • Must be for-profit.
  • Must be located in and do business within the U.S.
  • Cannot be a business that is considered ineligible for assistance by the SBA. A full list of ineligible businesses is available on the SBA website.
  • Must have a satisfactory FICO SBSS score.
  • Must have a feasible business plan.
  • Cannot have access to alternative funds from other sources.
 Businesses seeking a SBA 504 loan must meet the following requirements:

  • Must be for-profit.
  • Must be located in and do business within the U.S.
  • Cannot be a business that is considered ineligible for assistance by the SBA. A full list of ineligible businesses is available on the SBA website.
  • Must have a feasible business plan.
  • Cannot have access to alternative funds from other sources.

 

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